Mexico eyes future as LNG exporter

The completion of key pipeline projects has made Mexico confident that it could export LNG in the future, but its plans face tough competition.

The completion of the final leg of Mexican firm Fermaca's 5bn ft³/d (141.5mn m³/d) Wahalajara pipeline network last month marked the beginning of the end for the country's pipeline build-out. Ramped-up pipeline flows from the US have already reduced Mexico's reliance on LNG imports in recent months, and with US gas now reaching most of the country, Mexico may even have surplus volumes that it could export as LNG.

The prospect of Mexico exporting LNG was "unthinkable 5-6 years ago", Fermaca subsidiary Santa Fe Gas chief executive Santiago Garcia said, rejecting suggestions that increasing market competition could make such plans challenging. Growing Asian demand will require continuous growth of global liquefaction capacity, and the location of planned export facilities on Mexico's Pacific coast — which would eliminate the need to transit the Panama canal — will give Mexican facilities a competitive advantage, he added.

US firm Sempra Energy's Mexican arm plans to convert the existing Energia Costa Azul (ECA) import terminal on the country's Pacific coast into a liquefaction facility, with a final investment decision (FID) expected by the end of this year. There could also be scope for the 3.2mn t/yr Manzanillo import facility to be converted into a liquefaction facility, using gas supply through the Wahalajara pipeline, Garcia said. Alternative options would see Manzanillo continuing to receive LNG for periodic back-up supply or operate as a storage facility, he added.

Such plans face numerous headwinds. An FID on the ECA facility has been delayed multiple times despite Mexican private-sector firm IEnova already securing offtake agreements for the entire terminal's planned capacity, with the firm encountering difficulties in securing an export license. In July, Shell also filed an arbitration claim related to its storage contract at the terminal. The granting of ECA's export license could also depend on IEnova's agreement to build a second LNG export facility in Topolobampo, President Andres Manuel Lopez Obrador suggested last month.

Mexico will also have to compete for a market share with other large-scale export projects, such as those planned in Mozambique, as well as Qatar's planned expansion of the Ras Laffan complex. The global LNG market is expected to remain oversupplied until 2025, with the planned increase in liquefaction capacity set to outpace demand growth, the Paris-based IEA said in June. This coupled with the uncertain impact of the Covid-19 pandemic on global gas demand has further weakened appetite for investments in LNG projects, as low prices and buyers' reluctance to secure long-term deals "severely constrain capital budgets among developers", the IEA said.

While the geographical location could give Mexican facilities a logistical advantage, such projects would have to rely on gas imports from the US rather than on domestic production, especially given declining domestic output and the Mexican government's reluctance to carry out hydraulic fracturing, Garcia said. New domestic production in Mexico would have to be sold at $4.00-4.50/mn Btu in order to break even, Garcia said, making it uncompetitive with gas imports from the Permian basin.

With declining upstream production in Mexico and domestic demand set to grow further in the coming years, the issue of how to use the imported gas is also a divisive one. "Some are of the view that the pipeline imports should be for Mexico only," Garcia said, adding that the domestic network would need further development for domestic demand to develop further.

Mexico's network expansion is "behind the last mile", but the Mexican system is still "20-30 years behind" US infrastructure, head of government affairs at Fermaca, Fernando Alonso, said. New interconnectors are need to avoid bottle-necking on a number of lines, including the the 886mn ft³/d Villa de Reyes-Aguascalientes-Guadalajara (VAG) pipeline. The two largest pipeline systems in the 25-line build-out, the Wahalajara and Texas-Tuxpan systems, are still operating at less than 50pc, while delays to completing the 886mn ft³/d Tuxpan-Tula and 886mn ft³/d Tula-Villa de Reyes pipelines have led to bottlenecks on the Texas-Tuxpan line.

By Ellie Holbrook

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